Divorce on its own is a difficult situation. Dealing with the legal aspects of a divorce or legal separation from your spouse or domestic partner can create hard feelings and devastating emotional trauma, but it also can force you and your divorce lawyer to have to make complex, and sometimes contentious, financial calculations regarding alimony and child support.
However, there’s another aspect of finances and divorce that many family law attorneys tend to avoid discussing, but which may have long-lasting ramifications. The tax impact of the divorce can greatly affect the long term financial prospects of both parties involved in the legal separation.
Sometimes, if these issues are serious enough, they can result in criminal tax issues while the divorce is occurring, requiring the expertise of a tax attorney.
Criminal Tax Charges
Calculating taxes can be difficult enough on its own, especially for high-income earners or business owners. Add divorce to the process, and it almost becomes overwhelming … which is one reason why divorce lawyers tend to avoid the subject.
Another issue that sometimes arises from the changes in tax status during a divorce is a criminal tax problem.
Some of the everyday civil tax consequences clients need to consider when during a divorce include:
- Change to income tax filing status after divorce
- Tax credits and deduction changes after divorce
- Post-divorce tax planning
- Estate tax planning after divorce
- Tax credits for dependent care
- Tax effects of paying or receiving alimony
- Tax effects of paying or receiving child support
- Tax consequences of property transfers and sales in divorce
- Tax consequences of post-divorce changes in retirement benefit plan ownership
If not dealt with properly, these issues could evolve into legal proceedings. But the most common reasons that criminal tax issues are likely to surface in a divorce are as follows. One or both spouses have a history of cheating on their tax returns. Tax returns are considered presumptively correct as to the couple’s income with the divorce court. If the divorce court makes decisions based on understated income, spousal support, child support and property settlement calculations will be unfair to at least one spouse. If a forensic accountant is involved, they are likely to discover tax fraud as part of their analysis. One spouse is likely to attempt to hold tax fraud over the other spouse’s head to gain an upper hand in the divorce.
Frequently Asked Questions
- When is a Divorce likely to lead to Criminal Tax Exposure?
- Is Tax Fraud Likely to Be Disclosed During Divorce Proceedings?
- When Can a Divorce Result in Both a Husband and Wife Facing Exposure for the Potential Investigation and Conviction of Tax Crimes?
- What Should I Do About a Divorcing Spouse’s Threatened Criminal Tax Disclosure?
- Is a Full Disclosure of Assets Required During a Divorce Proceeding?
- What Is Asset Dissipation?
- How Can a Divorcing Spouse (and the IRS) Identify my Undisclosed Assets / Income?
- Can I Seek a Tax-Motivated Divorce or Annulment?
- When can Divorce Court Tax and Financial Records be Sealed or Redacted?
We have polled divorce attorneys across the country and collected the top five reasons that divorce lawyers mention as reasons they will ordinarily insist that a divorce client consult with a criminal tax defense attorney when dealing with criminal tax issues during a divorce.
1. Complicating the Divorce
Divorce and Family Law Attorney Russel Knight suggests hiring a tax attorney to protect the innocent spouse
Should one spouse be facing tax issues when entering the divorce proceedings or after they have begun, this can significantly complicate some of the aspects of divorce, says Russell Knight of the Law Office of Russell D. Knight. It may even delay the finalization of the proceedings.
“The final resolution will affect child support, alimony, distribution of assets, and, if someone goes to jail, parenting time,” Knight says. “So everything in a divorce is likely to be stayed or reserved while federal criminal charges are pending.”
Additionally, if one spouse was involved in tax fraud or other tax criminal proceedings before the divorce without the knowledge of the other spouse, a tax attorney can help protect the innocent spouse.
2. Complexity of Tax Issues
If someone is facing criminal charges, he or she would want to hire an attorney who is a specialist in handling local criminal charges. Someone with a charge of burglary pending would not hire a divorce attorney to try to craft a successful defense.
Attorney Matthew Dolan, of Dolan Divorce Lawyers PLLC suggests that a divorce lawyer should not attempt to handle criminal tax issues with which he or she has no experience
Similarly, according to Matthew Dolan, partner of Dolan Divorce Lawyers, PLLC, a divorce lawyer is not going to attempt to handle criminal tax issues with which he or she has no experience, even if the criminal tax situation could affect the divorce proceedings.
“If I have a divorce client facing criminal tax charges, I will immediately have them meet with an attorney who is experienced in criminal tax defense,” Dolan says. “I will then allow that experienced criminal defense [tax] attorney decide whether it is necessary to bring in any other specialists.”
Because of this complexity, Emily Warren with Griffiths Law PC says it may be important for someone to have a pair of attorneys when going through a divorce while facing tax issues.
“I would advise my client to have two attorneys,” Warren says. “Me handling the divorce and also a qualified criminal defense [tax] attorney.”
3. Federal Tax Laws
Because criminal issues related to federal taxes involve federal laws, any attorney needs to have specific knowledge with regard to the differences in federal versus state or local proceedings to be able to defend clients properly.
“As a divorce lawyer, we practice exclusively in state courthouses using state law,” Knight says. “Criminal tax charges are federal law. That’s a whole different ball game in an entirely different field, so we always refer those matters out.”
4. Protecting the Client’s Information
During divorce proceedings, clients must disclose quite a bit of information regarding their financial situations to the divorce lawyer. This is important to ensure the fairest possible judgment is being made regarding spousal support and child support, as well as the division of property.
However, a criminal tax lawyer would not want the client to disclose some of this information in a criminal case.
Attorney Emily Warren of Griffiths Law PC says it may be important for someone to have a pair of attorneys when going through a divorce while facing tax issues.
“As a divorce attorney, I never want to end up with something in my possession or knowledge that my divorce client is required to disclose in the divorce, but which would not be required to be disclosed by a criminal defendant,” Warren says. “That’s the kind of issue that ends up requiring consultation with ethics counsel.”
5. Contradictory Needs for Resolution
Ultimately, a divorce lawyer does not want to also advise someone facing criminal tax charges because a specific decision that would be considered a successful resolution in divorce proceedings could yield a devastating result in the criminal tax proceedings.
Clients need to have separate attorneys looking out for their best interests in each situation.
“It is very difficult for one attorney to adequately advise a client of two contradictory positions,” Warren says. “It’s really difficult to put on your criminal hat and take off your divorce hat and vice versa, while still meeting your ethical obligations to the client as to both matters.”
Finding a Tax Lawyer
Understandably, divorce lawyers often recommend that the client consult with a tax attorney for advice on protecting income and adhering to all federal and state tax laws during and after the divorce. Better yet, a dually licensed tax attorney and CPA can provide all-encompassing advice that helps clients overcome the difficulties involved in any changes in tax filing status after a divorce.
To schedule a 10-minute call with an experienced tax attorney, contact the Tax Law Offices of David W. Klasing. We have dual CPA and tax attorney capabilities, and our team is ready to handle any kind of tax situation you may be facing, including criminal tax problems arising after a divorce.
